Welcome to the Morningstar series, "Ask the Expert." I'm Holly Black. With me is Mark
Preskett from the Morningstar Investment Management team. Hello.
Mark Hi. So, there's a lot of uncertainty in the market
at the moment and we're seeing investors looking for safe havens and less risky places to stash
their money. So, one of those that we've been seeing is money market funds. So, what do
they do? So, a money market fund would generally in
highly liquid cash instruments with very short maturities, and they're typically seen as
one of the safest forms of investments you can make.
So, what do they actually hold? So, there's a variety of instruments that
a money market manager has at its disposal. So, probably the safest are T-bills. These
are issued by the U.K. Government's debt management office. Every week, they issue one-month,
three-month and six-month paper and generally, the return you receive is linked to the Bank
of England base rates Is that a bit like they issue debt and you
get a return on it? Absolutely. At the end of the period, so after
three months if you buy three-month paper, you get your money back as well plus some
interest over that period. There's also the specialist money market instruments that are
issued by banks. So, certificate of deposits, commercial paper and time deposits. And generally,
there the return is linked to the credit rating of the issuing bank. And there are other instruments
like covered bonds, short-term credit and even asset-backed securities which are used
by some managers to enhance yields. So, with all of that in a portfolio, what
sort of return can you expect? Generally, you should frame it around the
Bank of England base rates, which is currently 0.75%. And then, you should look at the credit
rating of the fund. If the credit rating is typically lower than – if fund A has a lower
credit rating than fund B, then the yield to maturity tends to be slightly higher. Also,
duration or maturity, how long they're lending, how long the paper that they're buying. And
finally, fees. That's probably the easiest way to see what return you're likely to get,
especially in this low-yielding environment. So, a fund Royal London Short Term Money Market
has an annual management charge of around – an ongoing charge of around 10 basis points.
So, when you're getting 75 basis points, you're giving back around 10 to the fund manager.
By contrast, BlackRock Cash is another well-known fund out there, has a 32 basis point ongoing
charge, which you know, eats into around half of your return. And you can really see that
in the return profile of the two funds. So, these are at the safer end of the spectrum.
But this is investment, so there's always going to be some risks, right?
Yeah, absolutely. I mean, I think it's fair to say that money market instruments are one
of the safest forms of investment out there. And the low return you receive reflects that
risk. However, there is always the risk of a bank defaulting, especially in a time of
crises. So, the way that the money market managers try and work around that is to have
a diverse range of banks that they deal with. So, the Royal London Fund has cash instruments
with 35 different banks, Vanguard has around 29. So, that mitigates the risk of a single
default. But we are seeing some money market managers dipping into the credit space which
opens you up to credit risk and potentially interest rate risk. So, it's definitely – the
shorter-term money market instruments are for those that are really nervous of keeping
– preserving their capital will be where we would focus your attention.
So why would I pick a money market fund in the first place? It seems like I could probably
earn a better return in a high street savings account.
Absolutely. You can get around 1.5% now from even an instant access account, some banks
are offering around 1.5%, whilst the money market funds are linked to base rates. But
these funds are suitable for inside tax wrappers like Sipps and Isas where you can't access
a traditional bank account. Because once your money is in a pension or
an Isa, you can't take it out without losing the tax benefits?
Absolutely. Yeah. And as portfolio managers we're using money market funds, A, as a sort
of – to preserve capital, keep powder dry in times of stress and take opportunities,
but also to manage the overall duration. We're finding that a lot of the bond instruments
that we can invest in are very exposed to interest rate risk. Governments are issuing
longer and longer debt. So, we actually have higher than average allocations to cash right
now as a way of protecting capital. Well, thank you so much for your time.
Thank you. And thanks for joining us.